Yr1 How the Macroeconomy Works: The Circular Flow of Income, Aggregate Demand/Aggregate Supply Analysis, and Related Concepts

Question 1

PART 1

Answer 1

THE CIRCULAR FLOW OF INCOME

Question 2

What are the 4 parts of the economy?

Answer 2

1. Households
2. Government
3. Firms
4. International sector

Question 3

What are the 4 factors of production and their rewards?

Answer 3

1. Capital > interest
2. Enterprise > profit
3. Labour > wages
4. Land > rent

Question 4

What parts of an economy are involved in a closed economy? (3 ish)

Answer 4

1. Households
2. Firms
3. Minimal / some government

Question 5

What parts of an economy are involved in an open economy? (4)

Answer 5

1. Households
2. Firms
3. Government
4. International countries

Question 6

What are the 3 measurement methods when measuring the quality of an economy? + what letters represent them

Answer 6

1. Income approach (Y)
2. Output approach (O)
3. Expenditure approach (E)

Question 7

What is the equation for the 3 measurement methods when measuring the quality of an economy?

Answer 7

Income approach A = expenditure A = output A

Y=E=O

> would represent a well functioning economy but not actually possible

Question 8

In circular flow diagram

1. What flows generally between firms and households? (2)
2. What flows from firms to households? (1)
3. What flows from households to firms? (1)
4. What are the injections into an economy? (3)
5. What are the withdrawals from an economy? (3)

Answer 8

1. Factors of production and goods + services
2. Wages
3. Consumer spending
4. Government spending, investment, exports
5. Taxation, savings, imports

Question 9

PART 2

Answer 9

AGGREGATE DEMAND AND AGGREGATE SUPPLY ANALYSIS

Question 10

What is the definition of aggregate demand?

Answer 10

The total spending on goods and services produced in the whole economy

Question 11

What are the 3 reasons for why the aggregate demand curve is downwards sloping?

Answer 11

1. Exports
2. Consumer stock of wealth
3. Consumer expectations of price

Question 12

What are the key determinants of consumer spending linked to the aggregate demand curve? (4)

Answer 12

1. Level of disposable income
2. The marginal propensity to consume
3. Government policies
4. Interest rate changes

Question 13

What goes on the x and y axis of an AD curve?

Answer 13

X > real output
Y > price level

Question 14

Label of aggregate demand

Answer 14

AD

Question 15

Relationship between price level and real output on the AD curve? + why

Answer 15

Inverse

Because when prices are high, consumers buy less so less goods and services are produced

Question 16

Definition of aggregate supply + overall what are the shifts due to

Answer 16

The total output of an economy (at a given price level and at a given time)

• shifts due to changes in economies productive capacities (quantity or quality of FofP)

Question 17

PART 3

Answer 17

THE DETERMINANTS OF AGGREGATE DEMAND

Question 18

What is the formula of aggregate demand? + what do each of the letters of components mean

Answer 18

AD = C + I + G + (X - M)

C = consumer spending
I = investment
G = gov spending
X-M = difference between spending on imports + receipts from exports (Balance of Payments)

Question 19

For a well performing economy, what equation should be balanced which links to aggregate demand and the circular flow of income?

Answer 19

I + G + X = S + T + M

Question 20

What causes a shift in the AD curve? (4)

Answer 20

1. Consumer spending
2. Investment
3. Government spending
4. Exports + imports

Question 21

PART 4

Answer 21

AGGREGATE DEMAND AND THE LEVEL OF ECONOMIC ACTIVITY

Question 22

What is the definition of the multiplier effect?

Answer 22

The relationship between change in aggregate demand and the resulting usually larger change in national income

Question 23

What is the key thing about a diagram showing the multiplier effect?

Answer 23

2 changes in AD so there should be 3 AD lines, each gaining a higher equilibrium point which is shifting to the right

Question 24

What is the definition of the accelerator effect?

DOUBLE CHECK DEFINITION

Answer 24

A change in the level of investment in new capital goods is induced by a change in the rate of forth of national income or AD

Question 25

Economic activity and the multiplier process (meaning and calculation)

Answer 25

NEED TO RESEARCH

Question 26

PART 5

Answer 26

DETERMINANTS OF SHORT-RUN AGGREGATE SUPPLY

Question 27

On the SRAS graph.. 1. X and y axis labels 2. How to label price level 3. How to label real output 4. Downwards or upwards sloping 5. What shift if there is an increase in SRAS 6. What shift if there is a decr in SRAS

Answer 27

1. X > real GDP (output) Y > price level 2. P1, p2, p3 3. Y1, y2, y3 4. Upwards 5. Moves rightways and downwards 6. Moves leftwards and upwards

Question 28

What causes shifts in the SRAS curve? (3)

Answer 28

1. Employment costs 2. Costs of other inputs 3. Impact of gov

Question 29

Why is the SRAS curve the shape it is?

Answer 29

Assumes one factor of production remains fixed in the short term

Question 30

PART 6

Answer 30

DETERMINANTS OF LONG-RUN AGGREGATE SUPPLY

Question 31

On the LRAS graph 1. X and y axis 2. Downwards or upwards sloping 3. Increase in LRAS 4. Decrease in LRAS

Answer 31

1. X > real output (GDP) Y > price level 2. Straight line vertical 3. Line right wards shift 4. Line shifts leftwards

Question 32

What causes shifts in the LRAS curve? (4) + one extra for a decrease in LRAS

Answer 32

1. Productivity of labour and capital 2. Labour market participation 3. Innovation and enterprise 4. Capital investment (technology) Extra - natural disasters

Question 33

Why is the SRAS curve the shape it is?

Answer 33

As it takes into account that no unemployment of resources and all resources are maximised and utilised The economy will correct itself

Question 34

Describe what the KEYNESIAN MODEL of aggregate supply and looks like and reasons for changes? (3 key parts and stages)

Answer 34

1. Begins flat short term (horizontal) 2. Economy begins to heat > steeper gradient 3. Long term vertical due to FULL EMPLOYMENT LEVEL

Question 35

What is meant by the full employment level in economics?

Answer 35

The maximum available resources are being utilised